Gauging the Favorableness of Variances When variances occur, they are described
ID: 2467707 • Letter: G
Question
Gauging the Favorableness of Variances
When variances occur, they are described as being either favorable or unfavorable. When actual activity consumes more time or money than initially planned, an unfavorable variance exists. However, when actual activity consumes less time or money than initially planned, a favorable variance exists. Note that the terms favorable and unfavorable are used, rather than saying that a variance is good or bad, because until the cause of a variance is discovered, it is not clear whether a variance is either good or bad.
Explanation / Answer
If a Company calculates that the actual cost for the actual hours worked by employees was $ 4,400,000, and the amount budgeted for those hours actually worked was $ 3,100,000, the actual cost for hours worked less the budgeted cost for hours worked is $ 1,300,000. This tells you that the actual cost at actual hours worked is more than the budgeted cost at actual hours worked. This is an unfavourable rate variance. If a Company calculates that the budgeted cost for actual hours worked is $ 110,000, and the budgeted cost at the budgeted amount of hours to have been worked is $ 180,000, the budgeted cost at actual time worked less the budgeted cost at the budgeted hours to have been worked is $ 70,000. This tells you that the actual hours worked at budgeted cost is lower. This is an unfavorable efficiency variance. All Amounts in $ Standard Direct Labor Cost Standard Standard Standard Price Hours per pair Cost per pair 8.3 2.6 21.58 Actual Direct Labor Cost Actual Total Actual Total Actual Cost Hours Cost/hr 58872 / 6690 = 8.8 Actual Cost Standard Cost Actual Hours Actual Rate Actual Hours Standard Standard Standard Rate Hours Rate 6690 8.8 6690 8.3 5590 8.3 58872 55527 46397 Labor Rate Variance = 3345 U Labor Efficiency Variance = 9130 U Total Labor Cost Variance = 12475 U
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